Debunking Myths - All Real Estate Investments are high risk

A myth is simply any invented story or generally held idea of something which often isn’t what the actual facts say. However, such stories have been repeated again and again that many have come to accept them as facts and truths. Sadly, many people don’t bother to find out whether such concepts are true, and this is often because we get such misleading information from certain authorities we would otherwise not have questioned, because we expect such people to know better and their views often shape our choices and decisions. However, that you heard something from a friend, family member, colleague at work, etc. does not necessarily mean it’s true. Such myths can be debunked with proper logical explanations though.

While some myths hold true and have actually saved many real estate investors and would-be investors from financial disasters, there are many other myths that have held many buyers back, and some have missed out on what eventually turned out to be great deals. Such is the notion that all real estate investments are high risk. This means that while such investment opportunities usually offer potentials for large financial returns, such rewards also come with a very high probability that such investments would be lost due to associated risks.

Risk Evaluation

At this juncture, it is important that we say this: in the words of Robert Kiyosaki, “no investment is risky; only the investor is risky”. This simply means that the more literate an investor is about a financial vehicle, the better the choices and decisions such an investor will make, and vice versa. While every real estate investment has its own risks, such risks would be minimized with the help of adequate and right information necessary for risk evaluation, or the use of third-parties in information gathering and risk assessment to ameliorate and curb risks which can arise. However, even for a sophisticated real estate investor or sponsor, evaluating risk frequently is more art than science.

Here are two types of risk to evaluate;

Real Estate Market Risks:

These are economic factors and trends in the market that generally affect buying and selling of real estate. When these happen, all actors in the real estate industry are most likely to be affected. Such market risks include inflation, economic recession, a national or global pandemic such as Ebola or COVID-19 crisis, as well as interest rate fluctuations. Also, rent control laws, land use acts and other environmental laws concerns often affect the real estate market. Since real estate investments are not liquid and cannot be easily converted to cash, this becomes difficult for investors to turn their investments into cash.

Investment Risks: Investment risks are risks specific to the investment structure. Whether for the long-term or short-term, real estate investments have the tendency to produce high returns. However, an investor can either buy investment properties, or acquire shares of a real estate investment trust also known as REIT. Both have their own pros and cons.

Buying investment properties such as a duplex or small apartment building is quite common. While it is also lucrative, not many can afford it, and those who do are saddled with the task of managing it themselves. They may also singlehandedly bear the liabilities of the challenges of property-specific risks, as well as self-manage such a property. The later comes with challenges of finding tenants, rent collection, legal fees to evict tenants, among other issues. To prevent your investment from becoming a part-time job, we recommend that you hire a property manager with 10 percent of your rental income.

On the other hand, you can buy shares of REIT and invest in an assortment of properties ranging from apartment buildings or commercial properties such as malls, warehouses, among others. With an estimated pay out of 90 percent of their earnings to their shareholders, REITs are a great source of passive income for investors. While it is similar to owning a property, the major difference is that compared to the above scenario, everyone else is doing the job for you. Risks are lowered, and profits are not hindered whether a tenant vacates an apartment or not.

The Bottom Line

Real estate investment has the potential to generate passive income and excellent returns as well as tax advantages and wealth building opportunity, it can also be risky, if you follow the “herd”, that is, what everybody is doing. But we recommend that you do your due diligence and conducting a thorough real estate market and rental property analysis. It is therefore crucial that an investor first overcome the emotions of fear and greed which hinder clear thoughts and good decision-making when making real estate investments. Fear will cripple you from making your first investment, while greed will push you into making a disastrous choice. High risks can be reduced if you successfully surround yourself with competent, good character individuals. Real estate is a people game and as such, get the best hands and minds that you can. At Gloch Stylistic Limited, we have a dynamic team of professional investment advisors that can guide your decision-making process. Visit our website www.glochstylictics.com for more information or send us an InMail and we would respond to all your questions.?